The hearty welcome of Yuliya Tymoshenko accorded a week ago by Vladimir Putin was impressing. Some say that Putin gave Tymoshenko the chance to portray her visit to Moscow as a victorious because he is allergic to the President of Ukraine, who symbolizes his political deafeat of 2004. Others consider Putin’s loyalty to be a political stake on the most promising candidate to become the next President of Ukraine. Others contend that Putin is searching for a person with whom it will be possible to come to certain understandings. Some contend that, knowing about recent Moscow’s disappointment in Yanukovych and understanding the importance of the pro-Russian electorate, Tymoshenko merited the peaceful disposition of the Kremlin with her manifold promises.

Nevertheless, such a friendly reception is not bound to repeat itself if Tymoshenko doesn’t show any progress in at least several very important - for Putin - spheres. These spheres are: Russian interest in the Odessa portside plant and the creation of a joint aviation concern (which should incorporate some of the Ukrainian profitable state aviation enterprises); the purchase of nuclear fuel from the Russian concern TVEL and stopping attempts to diversify the suppliers of nuclear fuel to the Ukrainian nuclear power plants and stopping cooperation with the American company Westinghouse; joint exploration and production of oil and gas; accord with the supply of Russian electricity to Europe; refuse to introduce a closed-cycled technology in the uranium enrichment industry; convert bilateral trade payments between Ukraine and Russia into Rubles (last year’s trade between Ukraine and Russia was for USD 30 billion).

We don’t want to mention the answers of Yuliya Tymoshenko to Putin’s questions about the future of the Black Sea Fleet after 2017 and the European and North Atlantic integration of Ukraine since the information about this conversation we have received might be not accurate. We hope that our source didn’t understand everything right…

It will be possible to find out which of the above-mentioned tasks is implemented and which is not only after the passage of time. Some of those propositions are favorable for Ukraine and some – obviously not. However, one thing is clear: if Kyiv wants the conversion to the European prices on gas to be gradual and is expecting Russia to help in negotiations with Turkmenistan, Uzbekistan and Kazakhstan, then Ukraine should take on some obligations that are comparable with the losses to be suffered by Gazprom from the non-European level of price for gas for Ukraine.

Incidentally, it will be not that easy to convince the Asian “trio”. First, Turkmenistan, for instance, thinks that the gas market today is primed for a considerable raise in price. Second, it will be hard to explain why Gazprom is not willing to raise price for Ukraine and, at the same time, encourages Azerbaijan to raise price of gas for Georgia. Third, Viktor Yushchenko’s visit to Ashgabat is planned for September, and Yushchenko’s reputation in Turkmenistan is not impeccable enough to bring any positive results.

Well, let’s assume that all sides came to understanding and signed an agreement on the gradual transition of Ukraine to the European price of gas. Let’s assume that Ukrainian politicians could secure a 20-25% rise in price on gas in 2009. Let’s assume that this transition will take four years. How will Kyiv cover the losses of Gazprom, which is closely connected with Putin? This question is unanswered. We didn't pose Oleh Dubina, head of NJSC Naftogaz Ukrainy, this difficult question. Oleh Viktorovych didn't participate in the talks of Tymoshenko and Putin, he doesn't deal with political payments, but, on the other hand, he is dealing with actual commercial payments. Thus, let’s leave the sphere of politics and turn to the sphere of economics.

— Oleh Viktorovych, is it true that Ukraine and Russia agreed on a gradual rise in price on gas for Ukraine as it was announced after the recent talks between Tymoshenko and Putin? Does this mean that a two-fold increase in price of gas or increase up to USD 400 for 1000 cubic meters of gas is not a real possibility today?

— As I said earlier, Naftogaz Ukrainy and Gazprom have created two expert groups to prepare issues for the future talks. I am only aware of the fact that both sides are disposed to introducing a gradual increase in price of gas for Ukraine.

— Did you discuss with the representatives of Gazprom the terms of the contract between Naftogaz and Gazprom? Will Ukraine and NJSC Naftogaz in particular be a third party in the negotiations between Gazprom and the Central Asian countries?

— No, we didn’t discuss the terms of the contract for the next year yet. NJSC Naftogaz will start negotiations about the terms for next year after we receive the necessary directives from the government. If the decision on transformation of the negotiations from the level of enterprises to the inter-governmental level is made, the Energy and Fuel Ministry will receive the directives and will conduct the talks.

— Is it possible that you will receive the directives from both the Cabinet of Ministers and the Secretariat of the President?

— I think that the directives will be coherent.

— When do you expect them?

— On the next week.

— Is it possible that we will sign the contract with Gazprom in January, as usual?

— It would be more correct to resolve this matter in September.

— What might be the formula for defining the price of gas for Ukraine in 2009?

— This question is being studied by the expert groups. The final formula will be defined during the negotiations.

— Will the transit tariff for pumping Russian gas through Ukraine be increased?

— If the price of gas is changed, then the transit tariff will be changed too.

— But in this case, the Russians promise to increase the transit tariff for transportation of Central Asian gas to Ukraine…

— Let’s consider that Ukraine buys Central Asian gas at the border between Russia and Ukraine…

— Will Ukraine try to ensure that all Russian gas exported to Europe is sold at the Eastern border of Ukraine and that Ukraine is negotiating with the buyers of Russian gas regarding the transit tariff?

— I think that this would be a political decision.

— Are our European partners, in your opinion, ready for such a decision?

— As a transit transporter of gas, we are unnoticeable for Europe since Gazprom is accountable for all gas supplies to Europe, and the fact that Naftogaz is transporting this gas through Ukraine in not mentioned in any of the agreements or contracts. Gazprom sells gas to European customers and the price of gas for them includes the costs of transit.

— Is it necessary for Ukraine, in your opinion, to join the negotiations on gas supplies between Russia and the Central Asian countries?

— On the one hand, there is no point in this as we have already lost the contracts with Turkmenistan and with Uzbekistan. However, on the other hand, if we don’t try to resume the relations with the Central Asian countries, we will be doomed to be dependent on Gazprom.

— According to ZN sources, the Ministry of Foreign Affairs of Ukraine requested that Naftogaz Oleksiy Ivchenko be named ambassador of Ukraine to Turkmenistan. Will this help to solve the problems?

— Considering that we don’t have any relations with Turkmenistan in gas sphere, if Mr. Ivchenko helps to conclude a direct contract on gas supplies with Turkmenistan (what he didn’t manage to do in 2005), we will be very grateful to him.

— What amount of gas produced in Ukraine and imported gas is there in underground gas storage facilities? What amount of gas are you planning to pump before the withdrawal season starts?

— We have around 6 billion cubic meters of imported gas and 1.4 billion cubic meters of gas produced in Ukraine. We plan to pump 4.7 billion cubic meters of gas produced in Ukraine and 14 billion cubic meters of imported gas under the condition that 55 billion cubic meters of gas is supplied to Ukraine annually. And all this amount of gas is the property of Naftogaz.

— As far as it is known, Naftogaz was going to take a loan in order to purchase gas for the underground storage facility. Did you take any loan, if yes, then what financial institution was your lender? What were the terms of the loan?

— We received permission from the State Property Fund of Ukraine to take out a loan and we sent our proposal to 12 different banks. Eight of them have already sent us their terms. However, most of the terms are not suitable for us. That's why we continue to negotiate with a pool of Ukrainian banks and with the National Bank of Ukraine to attract the necessary funds.

— What are the liabilities of the Ukrainian consumers of gas to NJSC Naftogaz?

— Municipal energy enterprises are our main debtors. They owe us around UAH 1.8 billion and the residents owe us UAH 153 million. Liabilities of industrial enterprises are around UAH 450 million totally. The biggest debtors among the industrial enterprises are OJSC Rivneazot– UAH 119.9 million, Dneproazot– UAH 153 million, Crimean soda plant – UAH 50 million, Crimean Titanium– UAH 30 million. And the debts of these enterprises appeared in April-May, 2008.

— By how many times did Naftogaz Ukrainy increase its own debts?

— We did not increase our debts. Furthermore, we have cleared around USD 800 million of our debts. At the time being, liabilities of NJSC Naftogaz Ukrainy connected with external loans are around UAH 10.5 billion. And we haven’t taken any new loans.

— What about the issue on bankruptcy of Naftogaz? What do your auditors, Ernst and Young, say about this?

— We have received financial conclusions (results of audit) for 2006 and first half of 2007. I think that the bankruptcy of Naftogaz is unfavorable for both the country and our creditors.

— Russian Prime Minister Vladimir Putin mentioned the debts of Ukraine to Gazprom during the recent meeting with Yuliya Tymoshenko. What are these debts?

— NJSC Naftogaz doesn’t have any debts to Gazprom for 2008. Those USD 2 billion that the Russian prime minister mentioned, form the debt of the companies UkrGaz-Energo and RosUkrEnergo to Gazprom for 2007.

— What is your opinion on the conclusions stated in the draft decision of the National Security and Defense Board concerning Naftogaz and their intention to put the National Security and Defense Board in charge of Naftogaz or practically divide the company?

— I have found out about the existence of this draft from ZN.

— Nevertheless, what’s your opinion?

— When I was about to accept the post of the head of Naftogaz I asked: “Is Naftogaz necessary to the country?” And I received an answer: “Yes, it is necessary.” And now, according to the decision of the National Security and Defense Board, NJSC Naftogas is not necessary…

— Actually, Naftogaz was created to accumulate resources and cash flows, a considerable part of which was spent for different personal and political needs of the leaders of the country. Is there a possibility to rid the company of dirty and shady schemes? Are the Security Service of Ukraine and the General Prosecutor’s Office able to contribute in this process?

— At the time being, there is the possibility to clean up our company. Furthermore, during last six months, we were successfully doing this with the help of the government. During this time, we were able to pay a considerable part of our debts and resolve the problem with payments from UkrGaz-Energo. It is possible to move further with cleaning now. However, one should understand that we need money in order to clean everything in our company. And we have a lot of losses because of unsatisfactory work of the subsidiaries which we don’t know how to cover. This is not right.

— Starting from April, 2008, Naftogaz Ukrainy has increased the price of gas for industrial consumers and this has caused their displeasure…

— I don’t think that UAH 87 (USD 15) for every 1000 cubic meters of gas is a big margin for Naftogaz! It is considered normal that we supply gas to the residents of the country for a minimal price in detriment to the company. Nobody notices this difference. My opinion is that considering the number of years we worked at a loss, Naftogaz’s margin should be USD 150 from every 1000 cubic meters of gas.

— How is the price of gas for industrial consumers calculated and where is the margin received from the sales of gas (bought for USD 179.5 for 1000 cubic meters and sold for more than USD 300) goes to?

— About twelve percent of it is going to the government’s special fund, 8% – is an extra charge for supplying services, UAH 87 is going to Naftogas for the purposes of development of the company.

— Oleh Viktorovych, how many intermediaries (traders) does Naftogaz have today?

— Naftogaz has one trader – its subsidiary Gaz Ukrainy. I can’t say for sure what they do in regional Oblgazs that receive gas from our company. However, I can guarantee that we deliver gas to Gaz Ukrainy and Gaz Ukrainy delivers it directly to the consumers.

— How many gas traders are there in the Ukrainian energy market? I remember that there were around 2 thousand of gas traders last year.

— As far as I know, 415 licenses have been issued this year.

— The National Security and Defense Board accuses Naftogaz of participating in development of the concept of the gas market of Ukraine. What can you say in return?

— The priority tasks correspond with the concepts of the gas market. What concept can we talk about if we import 80% of the necessary for the country’s gas balance gas? There is a state company NJSC Naftogaz Ukrainy that sells this gas at its loss.

If production of hydrocarbons in Ukraine was more than the demand in them, we could talk about some concepts. However, at the time being, there is no sense in such talks…

— But the Russians are trying to improve the work of Gazprom by increasing the price of gas for the residents and municipal enterprises.

— Yes, but don’t forget that Russia is a producer and exporter of gas. First, they approved a program for the gradual increase in price of gas for the residents for the period up to 2011 and then, they prolonged it to 2014.

— How do you see the future of NJSC Naftogaz after a half-year’s work in the company?

— I think that this company should be prepared for a pre-purchase assessment and offered for sale. Not separately taken gas and transport system, or pipelines, but the entire company. Then, the level of its capitalization will correspond with expected financial result.

NJSC Naftogaz should be a base for creation of a big business. It shouldn’t be a kind of sponsor that provides low prices for the residents. If you pay, you receive gas. If not, you don’t receive gas. Today, Dniepropetrovsk is without hot water because of the debts to municipal energy enterprises. It is for the first time in the history – an unprecedented case – the work of the Kharkov heat-electric generating plant #3 and heat-electric generating plant #5 is stopped because of the debts.

— At the energy forum in Kyiv, V.Yushchenko announced that he intended to create an international pool with a USD 2.5 billion budget to finance the reconstruction of Ukrainian gas transport system. What part of this complicated system is supposed to be reconstructed and what is the position of Naftogaz concerning this?

— Ukrainian gas transport system transports around 115 billion cubic meters of Russian export gas annually. In order to start its reconstruction, it is necessary to define the direction in which we are going to develop our gas transport system. If the matter at hand concerns increasing the amount of gas pumped through the system to 170 billion cubic meters annually, then it would be worthwhile to evaluate the efficiency of the installation of gas turbine engines in gascompressor units. Today, installation of electric machines is not paying. However, it might be worth it if the amount of gas pumped through the system is increased to 170 cubic meters annually.

— Does Naftogas make any attempts to install gas-measuring stations at the inlet and outlet terminals of the Ukrainian gas transport system?

— Yes, it does. We are now waiting for the decision of the governmental commission on Ukrtransgaz. Without this decision, we are not able to start any improvements. We are also being inspected for the second time now.

— By the Control and Audit Board?

— Yes.

— Did the Control and Audit Board really find violations in the work of Naftogaz in 2007 of UAH 2.2 billion?

— You know, I usually analyze conclusions of the inspections and audits only when they are handed to the General Prosecutor’s Office and not when they are discussed in different TV shows…

— The General Prosecutor’s Office claimed that Naftogaz is not paying customs duties for gas supplied to Ukraine in the first quarter of 2008. It has even instituted criminal proceedings…

— The General Prosecutor’s Office instituted a criminal case and transferred it to the Security Service of Ukraine. I would like to note that Naftogaz is not able today to pay this customs duty since there are no acceptance reports on this gas or those reports that are there do not comply with existing commercial law, and I don't have the right to sign them.

— Does Naftogaz possess any legal means to organize shareholders’ meetings at those open joint stock companies in which the state share is considerable –Ukrnafta and UkrGaz-Energo?

— No, and we won’t have such possibility until the law on open joint stock companies is amended.

— In other words, the situation with dividends that Ukrnafta and UkrGaz-Energo should pay to Naftogaz is not clear. What are the losses of Naftogaz from this?

— The losses are huge. The dividends that Ukrnafta should pay for 2006-2007 are more than UAH 2 billion. And the dividends that UkrGaz-Energo is supposed to pay for 2007 are USD 150 million.

— What is your opinion on the conflict with Prykerch oil and gas bearing territory? Naftogaz also intended to get a part of it…

— I think that this topic is overly politicized. The problem is that nowhere in the world such a huge territory (around 13 thousand square kilometers) is allotted to one company. In my opinion, the situation is as follows: we sold too large a plot to a speculator. If we divided that plot into 12-15 sections and put them up for sale by tender, we would have already had results. At present, two years after this big plot was allotted to that small company, no works in the Prykerch oil and gas bearing territory have been started.

— What is your proposal concerning Ukrainian part of the Black Sea shelf?

— I would propose to conclude an agreement on joint development of the Black Sea shelf on the territories of Ukraine and Russia between Ukraine and Gazprom. We would work with them on their territory and they would work with us on our territory.

— What company from the Ukrainian side should be a party to this agreement – Chernomorneftegaz?

— No, only NJSC Naftogaz Ukrainy should be a party to this agreement.

— Why do you propose to conclude an agreement on the development of the Black Sea shelf with Gazprom?

— The Russians are interested in oil. We are ready to develop Ukrainian fields in the shelf together with the Russians and give them all oil in exchange for all gas. We don’t need oil today since we don’t have any oil-processing enterprises and we have very high duties to export it. In our case, it wouldn’t be a business. That’s why I talk about gas today. We could conclude a production sharing agreement so that Gazprom would take away oil and we would take away gas.

And those joint ventures created between Chernomorneftegaz and Canadian company Shelton Canada Corp. and British CBM Oil don't bring any results. Today, we are going to abrogate the contracts on joint development of the shelf with those companies. They don’t want to sell gas to the residents of Ukraine because the price of gas for the residents is USD 50 when the price of gas for the industrial consumers is USD 300…

— Oleh Viktorovych, did you finally sign a contract with your employer – the Fuel and Energy Ministry?

— No.

— What points of the contract don’t suit you?

— Some principal definitions. Such contracts should stipulate responsibility of both sides and this contract stipulates only my responsibilities. At the same time, the amendments I proposed were not considered. They have explained that this contract is a regular contract approved by the Cabinet of Ministers. That’s all.

Alla YEREMENKO